of 87 /87
Syllabus Syllabus Class 1 (Jan 5): chap 1; chap 2, case study Class 1 (Jan 5): chap 1; chap 2, case study Class 2: (Jan 12) No Class Class 2: (Jan 12) No Class Class 3: (Jan 19) Chap 6, Chap 8 Class 3: (Jan 19) Chap 6, Chap 8 Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam) Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam) Class 5: (Feb 2) Chap 5, Chap 7 Class 5: (Feb 2) Chap 5, Chap 7 Class 6: (Feb 9) Chap 9, Chap 12, 14 Class 6: (Feb 9) Chap 9, Chap 12, 14 Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts Have Nothing To Do!” Available in the Lewis and Clark Bookstore Have Nothing To Do!” Available in the Lewis and Clark Bookstore Class 8: (Feb 23) Cabela’s Tour Class 8: (Feb 23) Cabela’s Tour Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam) Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam) Other requirements: Other requirements: visit Harley-Davidson Plant in Kansas City to see visit Harley-Davidson Plant in Kansas City to see operations management in practice and write a 3-5 page paper operations management in practice and write a 3-5 page paper comparing the class slides and readings to the Harley operations comparing the class slides and readings to the Harley operations Home Work Home Work

Supply Chain Management Supply Chain Management

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Page 1: Supply Chain Management Supply Chain Management

SyllabusSyllabus• Class 1 (Jan 5): chap 1; chap 2, case studyClass 1 (Jan 5): chap 1; chap 2, case study• Class 2: (Jan 12) No ClassClass 2: (Jan 12) No Class• Class 3: (Jan 19) Chap 6, Chap 8Class 3: (Jan 19) Chap 6, Chap 8• Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam)Class 4: (Jan 26) chap 10, chap 11, Chap 17(Take home exam)• Class 5: (Feb 2) Chap 5, Chap 7Class 5: (Feb 2) Chap 5, Chap 7• Class 6: (Feb 9) Chap 9, Chap 12, 14Class 6: (Feb 9) Chap 9, Chap 12, 14• Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts Class 7: (Feb 16) Chap 15, Reverse Logistics – need “The Forklifts

Have Nothing To Do!” Available in the Lewis and Clark BookstoreHave Nothing To Do!” Available in the Lewis and Clark Bookstore• Class 8: (Feb 23) Cabela’s TourClass 8: (Feb 23) Cabela’s Tour• Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam)Class 9: (Mar 2) Chap 13; Chap 16, Chap 4 (take home exam)• Other requirements: Other requirements:

→→visit Harley-Davidson Plant in Kansas City to see visit Harley-Davidson Plant in Kansas City to see operations management in practice and write a 3-5 page paper operations management in practice and write a 3-5 page paper comparing the class slides and readings to the Harley operationscomparing the class slides and readings to the Harley operations

→ → Home Work Home Work

Page 2: Supply Chain Management Supply Chain Management

Supply Chain Supply Chain ManagementManagement

Page 3: Supply Chain Management Supply Chain Management

Supply Chain Supply Chain Management Management

• First appearance – Financial Times • Importance -

→ Inventory ~ 14% of GDP→ GDP ~ $12 trillion→ Warehousing/Trans ~ 9% of GDP→ Rule of Thumb - $12 increase in sales to = $1 savings in Supply Chain

• 1982 Peter Drucker – last frontier• Supply Chain problems can cause ≤ 11% drop in stock

price• Customer perception of company

Page 4: Supply Chain Management Supply Chain Management

SCORSCOR

Reference: www.supply-chain.org

Page 5: Supply Chain Management Supply Chain Management

Supply ChainSupply Chain All activities associated with the flow All activities associated with the flow

and transformation of goods and and transformation of goods and services from raw materials to the end services from raw materials to the end user, the customeruser, the customer

A sequence of business activities A sequence of business activities from suppliers through customers from suppliers through customers that provide the products, services, that provide the products, services, and information to achieve customer and information to achieve customer satisfactionsatisfaction

Page 6: Supply Chain Management Supply Chain Management

Supply ChainSupply Chain

“The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.”

APICS Dictionary, 10th ed.

Page 7: Supply Chain Management Supply Chain Management

Supply Chain ManagementSupply Chain Management

Synchronization of activities Synchronization of activities required to achieve maximum required to achieve maximum competitive benefitscompetitive benefits

Coordination, cooperation, and Coordination, cooperation, and communicationcommunication

Rapid flow of informationRapid flow of informationVertical integrationVertical integration

Page 8: Supply Chain Management Supply Chain Management

Supply Chain UncertaintySupply Chain Uncertainty

Forecasting, lead times, batch Forecasting, lead times, batch ordering, price fluctuations, and ordering, price fluctuations, and inflated orders contribute to inflated orders contribute to variabilityvariability

Inventory is a form of insuranceInventory is a form of insuranceDistorted information is one of Distorted information is one of

the main causes of uncertainty the main causes of uncertainty Bullwhip effectBullwhip effect

Page 9: Supply Chain Management Supply Chain Management

Information in the Information in the Supply ChainSupply Chain

Centralized coordination of Centralized coordination of information flowsinformation flows

Integration of transportation, Integration of transportation, distribution, ordering, and productiondistribution, ordering, and production

Direct access to domestic and global Direct access to domestic and global transportation and distribution transportation and distribution channelschannels

Locating and tracking the movement Locating and tracking the movement of every item in the supply chain - of every item in the supply chain - RFIDRFID

Page 10: Supply Chain Management Supply Chain Management

Information in the Information in the Supply ChainSupply Chain

Consolidation of purchasing from all Consolidation of purchasing from all supplierssuppliers

Intercompany and intracompany Intercompany and intracompany information accessinformation access

Electronic Data InterchangeElectronic Data Interchange Data acquisition at the point of origin Data acquisition at the point of origin

and point of saleand point of sale Instantaneous updating of inventory Instantaneous updating of inventory

levelslevels Visibility Visibility

Page 11: Supply Chain Management Supply Chain Management

Electronic BusinessElectronic Business Replacement of physical processes Replacement of physical processes

with electronic oneswith electronic ones Cost and price reductionsCost and price reductions Reduction or elimination of Reduction or elimination of

intermediariesintermediaries Shortening transaction times for Shortening transaction times for

ordering and deliveryordering and delivery Wider presence and increased visibilityWider presence and increased visibility

In Theory:

Page 12: Supply Chain Management Supply Chain Management

Electronic BusinessElectronic Business Greater choices and more information for Greater choices and more information for

customerscustomers Improved serviceImproved service Collection and analysis of customer data Collection and analysis of customer data

and preferencesand preferences Virtual companies with lower pricesVirtual companies with lower prices Leveling the playing field for smaller Leveling the playing field for smaller

companiescompanies Gain global access to markets & customersGain global access to markets & customers

Page 13: Supply Chain Management Supply Chain Management

Electronic Data InterchangeElectronic Data Interchange

Computer-to-computer exchange of Computer-to-computer exchange of business documents in a standard business documents in a standard formatformat

Quick access, better customer service, Quick access, better customer service, less paperwork, better communication, less paperwork, better communication, increased productivity, improved increased productivity, improved tracing and expediting, improves billing tracing and expediting, improves billing and cost efficiencyand cost efficiency

Page 14: Supply Chain Management Supply Chain Management

Bar CodesBar Codes

Computer readable codes attached to Computer readable codes attached to items flowing through the supply chainitems flowing through the supply chain

Generates point-of-sale data which is Generates point-of-sale data which is useful for determining sales trends, useful for determining sales trends, ordering, production scheduling, and ordering, production scheduling, and deliver plansdeliver plans

1234 5678

Page 15: Supply Chain Management Supply Chain Management

IT IssuesIT Issues Increased benefits and sophistication Increased benefits and sophistication

come with increased costscome with increased costs Efficient web sites do not necessarily Efficient web sites do not necessarily

mean the rest of the supply chain will mean the rest of the supply chain will be as efficientbe as efficient

Security problems are very real – Security problems are very real – camera phones, cell phones, thumb camera phones, cell phones, thumb drivesdrives

Collaboration and trust are important Collaboration and trust are important elements that may be new to business elements that may be new to business relationshipsrelationships

Page 16: Supply Chain Management Supply Chain Management

SuppliersSuppliers Purchased materials account for about Purchased materials account for about

half of manufacturing costshalf of manufacturing costs Materials, parts, and service must be Materials, parts, and service must be

delivered on time, of high quality, and delivered on time, of high quality, and low costlow cost

Suppliers should be integrated into Suppliers should be integrated into their customers’ supply chainstheir customers’ supply chains

Partnerships should be establishedPartnerships should be established On-demand delivery (JIT) is a frequent On-demand delivery (JIT) is a frequent

requirement - what is JIT and does it requirement - what is JIT and does it work?work?

Page 17: Supply Chain Management Supply Chain Management

SourcingSourcing Relationship between customers and Relationship between customers and

suppliers focuses on collaboration and suppliers focuses on collaboration and cooperationcooperation

Outsourcing has become a long-term Outsourcing has become a long-term strategic decisionstrategic decision

Organizations focus on core Organizations focus on core competenciescompetencies

Single-sourcing is Single-sourcing is increasingly a part increasingly a part of supplier relationsof supplier relations

How doessingle source

differ from solesource?

Page 18: Supply Chain Management Supply Chain Management

DistributionDistribution The actual movement of products and The actual movement of products and

materials between locationsmaterials between locations Handling of materials and products at Handling of materials and products at

receiving docks, storing products, receiving docks, storing products, packaging, and shippingpackaging, and shipping

Often called logisticsOften called logistics Driving force today Driving force today

is speedis speed Particularly important Particularly important

for Internet dot-comsfor Internet dot-coms

Page 19: Supply Chain Management Supply Chain Management

Distribution Centers Distribution Centers and Warehousingand Warehousing

DCs are some of the largest business DCs are some of the largest business facilities in the United Statesfacilities in the United States

Trend is for more frequent orders in Trend is for more frequent orders in smaller quantitiessmaller quantities

Flow-through facilities and automated Flow-through facilities and automated material handlingmaterial handling

Final assembly and product Final assembly and product configuration configuration (postponement) (postponement) may may be done at the DCbe done at the DC

Page 20: Supply Chain Management Supply Chain Management

Warehouse Management Warehouse Management SystemsSystems

Highly automated systemsHighly automated systems A good system will control item A good system will control item

slotting, pick lists, packing, and slotting, pick lists, packing, and shippingshipping

Most newer systems include Most newer systems include transportation management (load transportation management (load management/configuration), order management/configuration), order management, yard management, labor management, yard management, labor management, warehouse optimizationmanagement, warehouse optimization

Page 21: Supply Chain Management Supply Chain Management

Vendor-Managed InventoryVendor-Managed Inventory Not a new concept – same process used by Not a new concept – same process used by

bread deliveries to stores for decadesbread deliveries to stores for decades Reduces need for warehousingReduces need for warehousing Increased speed, reduced errors, and Increased speed, reduced errors, and

improved serviceimproved service Onus is on the supplier to keep the shelves Onus is on the supplier to keep the shelves

full or assembly lines runningfull or assembly lines running variation of JITvariation of JIT Proctor&Gamble - Wal-MartProctor&Gamble - Wal-Mart DLA – moving from a manager of supplies to DLA – moving from a manager of supplies to

a manager of suppliersa manager of suppliers Direct Vendor Deliveries – loss of visibilityDirect Vendor Deliveries – loss of visibility

Page 22: Supply Chain Management Supply Chain Management

Collaborative Distribution Collaborative Distribution and Outsourcingand Outsourcing

Collaborative planning, forecasting, and Collaborative planning, forecasting, and replenishment (CPFR) started by Nabiscoreplenishment (CPFR) started by Nabisco

Allows suppliers to know what is really needed Allows suppliers to know what is really needed and whenand when

Electronic-based exchange of data and Electronic-based exchange of data and informationinformation

Significant decrease in inventory levels and Significant decrease in inventory levels and more efficient logistics - maybe not!more efficient logistics - maybe not!

Companies work together for benefit of all of Companies work together for benefit of all of the supply chainthe supply chain

Page 23: Supply Chain Management Supply Chain Management

TransportationTransportation

Common methods are railroads, Common methods are railroads, trucking, water, air, intermodal, trucking, water, air, intermodal, package carriers, and pipelinespackage carriers, and pipelines

Page 24: Supply Chain Management Supply Chain Management

RailroadsRailroads

150,000 miles in US150,000 miles in USLow cost, high-volumeLow cost, high-volume Improving flexibilityImproving flexibility

intermodal serviceintermodal service double stackingdouble stacking

Complaints: slow, inflexible, large loadsAdvantages: large/bulky loads, intermodal

Page 25: Supply Chain Management Supply Chain Management

Award-Winning Service Award-Winning Service RecognitionRecognition

Wal-Mart Stores, Inc.Carrier of the Year – 5 years in a row

TargetOnly rail carrier to receive the Vice President’s Award

American Honda Motor CompanyPremier Partner – 4 consecutive years

Toyota’s North American Partsand Logistics Division (NAPLD)Rail Carrier of the Year – 3 consecutive years

KIACarrier of the Year

SchneiderCarrier of the Year – 3 consecutive years

Federal ExpressOnly rail carrier to receive outstandingsupplier award - 2 years in a row

United Parcel Service99.5% failure free, damage free and on-time rating from United Parcel Service every year since 1995

Page 26: Supply Chain Management Supply Chain Management

Most used mode in US -75% of total Most used mode in US -75% of total freight (not total weight)freight (not total weight)

Flexible, small loadsFlexible, small loads Consolidation, Consolidation,

Internet load match sitesInternet load match sites Single sourcing reduces number of Single sourcing reduces number of

trucking firms serving a companytrucking firms serving a company Truck load (TL) vs. Less Than Truck Truck load (TL) vs. Less Than Truck

Load (LTL)Load (LTL)

TruckingTrucking

Page 27: Supply Chain Management Supply Chain Management

AirAirRapidly growing segment of Rapidly growing segment of

transportation industrytransportation industryLightweight, small itemsLightweight, small itemsQuick, reliable, expensive Quick, reliable, expensive

(relatively expensive depending (relatively expensive depending on costs of not getting item there)on costs of not getting item there)

Major airlines and US Postal Major airlines and US Postal Service, UPS, FedEx, DHLService, UPS, FedEx, DHL

Page 28: Supply Chain Management Supply Chain Management

Package CarriersPackage Carriers FedEx, UPS, US Postal Service, DHLFedEx, UPS, US Postal Service, DHL Significant growth driven by Significant growth driven by

e-businesses and the move to smaller e-businesses and the move to smaller shipments and consumer desire to have it shipments and consumer desire to have it NOWNOW

Use several modes Use several modes of transportationof transportation

Expensive - relative!!Expensive - relative!! Fast and reliable - relative!!Fast and reliable - relative!! Innovative use of technologies in some Innovative use of technologies in some

casescases Online tracking – some better than othersOnline tracking – some better than others

Page 29: Supply Chain Management Supply Chain Management

IntermodalIntermodalCombination of several modes of Combination of several modes of

transportationtransportationMost common are truck/rail/truck Most common are truck/rail/truck

and truck/water/rail/truckand truck/water/rail/truckEnabled by the use of containers – Enabled by the use of containers –

the development of the 20 and 40 the development of the 20 and 40 foot containers significantly foot containers significantly changed the face of shippingchanged the face of shipping

~2% of all US cargo via intermodal~2% of all US cargo via intermodal

Page 30: Supply Chain Management Supply Chain Management

WaterWaterOne of oldest means of transportOne of oldest means of transportLow-cost, high-volume, slow Low-cost, high-volume, slow

(relative)(relative)Security - sheer volume - millions of Security - sheer volume - millions of

containers annuallycontainers annuallyBulky, heavy and/or large itemsBulky, heavy and/or large itemsStandardized shipping containers Standardized shipping containers

improve serviceimprove serviceThe most common form of The most common form of

international shippinginternational shipping

Page 31: Supply Chain Management Supply Chain Management

PipelinesPipelinesPrimarily for oil & refined oil Primarily for oil & refined oil

productsproductsSlurry lines carry coal or kaolinSlurry lines carry coal or kaolinHigh initial capital investmentHigh initial capital investmentLow operating costsLow operating costsCan cross difficult terrainCan cross difficult terrain

Page 32: Supply Chain Management Supply Chain Management

Global Supply ChainGlobal Supply Chain

Free trade & global opportunitiesFree trade & global opportunitiesNations form trading groupsNations form trading groupsNo tariffs or dutiesNo tariffs or dutiesFreely transport Freely transport

goods across bordersgoods across bordersSecurity!!Security!!

Page 33: Supply Chain Management Supply Chain Management

Global Supply Chain Global Supply Chain ProblemsProblems

National and regional differencesNational and regional differencesCustoms, business practices, and Customs, business practices, and

regulationsregulationsForeign markets are Foreign markets are

not homogeneousnot homogeneousQuality can be a Quality can be a

major issuemajor issue

Page 34: Supply Chain Management Supply Chain Management

Security Security • ~ 10+ million containers annually• Customs-Trade Partnership Against Terrorism (C-

TPAT)• Port Security – SAFE Ports Act; Scanning of all

Containers• Cost - $2 billion closing of major port• 66% of all goods into US comes through 20 major

ports• 44% through LA/Long Beach• Cost of attack on major port estimated at $20

Billion

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Page 38: Supply Chain Management Supply Chain Management
Page 39: Supply Chain Management Supply Chain Management

Chapter 11Chapter 11

ForecastingForecasting

Page 40: Supply Chain Management Supply Chain Management

Forecasting SurveyForecasting Survey

• How far into the future do you typically project when trying to forecast the health of your industry?

less than 4 months 3% 4-6 months 12%

7-12 months28% > 12 months

57%Fortune Council survey, Nov 2005

Page 41: Supply Chain Management Supply Chain Management

Indices to forecast health Indices to forecast health of industryof industry

• Consumer price index 51%• Consumer Confidence index 44%• Durable goods orders 20%• Gross Domestic Product 35%• Manufacturing and trade inventories and

sales 27%• Price of oil/barrel 34%• Strength of US $ 46%• Unemployment rate 53%• Interest rates/fed funds 59%

Fortune Council survey, Nov 2005

Page 42: Supply Chain Management Supply Chain Management

Forecasting ImportanceForecasting Importance

• Improving customer demand forecasting and sharing the information downstream will allow more efficient scheduling and inventory management

• Boeing, 1997: $2.6 billion write down due to “raw material shortages, internal and supplier parts shortages” Wall Street Journal, Oct 23, 1987

Page 43: Supply Chain Management Supply Chain Management

Forecasting ImportanceForecasting Importance

• “Second Quarter sales at US Surgical Corporation decline 25%, resulting in a $22 mil loss…attributed to larger than anticipated inventories on shelves of hospitals.” US Surgical Quarterly, Jul 1993

• “IBM sells out new Aetna PC; shortage may cost millions in potential revenue.” Wall Street Journal, Oct 7, 1994

Page 44: Supply Chain Management Supply Chain Management

Principles of ForecastingPrinciples of Forecasting• Forecasts are usually wrong

• every forecast should include an estimate of error

• Forecasts are more accurate for families or groups

• Forecasts are more accurate for nearer periods.

Page 45: Supply Chain Management Supply Chain Management

Important Factors to Important Factors to Improve ForecastingImprove Forecasting

• Record Data in the same terms as needed in the forecast – production data for production forecasts; time periods

• Record circumstances related to the data

• Record the demand separately for different customer groups

Page 46: Supply Chain Management Supply Chain Management

Forecast TechniquesForecast Techniques

• Extrinsic Techniques – projections based on indicators that relate to products – examples

• Intrinsic – historical data used to forecast (most common)

Page 47: Supply Chain Management Supply Chain Management

ForecastingForecasting• Forecasting errors can increase the total

cost of ownership for a product- inventory carrying costs

- obsolete inventory- lack of sufficient inventory

- quality of products due to accepting marginal products to prevent stockout

Page 48: Supply Chain Management Supply Chain Management

ForecastingForecasting• Essential for smooth operations of

business organizations• Estimates of the occurrence, timing,

or magnitude of uncertain future events

• Costs of forecasting: excess labor; excess materials; expediting costs; lost revenues

Page 49: Supply Chain Management Supply Chain Management

ForecastingForecastingPredicting future eventsPredicting future eventsUsually demand behavior Usually demand behavior

over a time frameover a time frameQualitative methodsQualitative methods

Based on subjective methodsBased on subjective methods

Quantitative methodsQuantitative methods Based on mathematical formulasBased on mathematical formulas

Page 50: Supply Chain Management Supply Chain Management

Impact of Just-in-TimeImpact of Just-in-Timeon Forecastingon Forecasting

• Just in time as a inventory method

• Just in time as a Continuous process improvement program

• Just in time - one on the shelf

• Usage factors

• Single order vs. Case order

Page 51: Supply Chain Management Supply Chain Management

Strategic Role of Strategic Role of ForecastingForecasting

Focus on supply chain managementFocus on supply chain management Short term role of product demandShort term role of product demand Long term role of new products, Long term role of new products,

processes, and technologiesprocesses, and technologiesFocus on Total Quality ManagementFocus on Total Quality Management

Satisfy customer demandSatisfy customer demand Uninterrupted product flow with no Uninterrupted product flow with no

defective itemsdefective itemsNecessary for strategic planningNecessary for strategic planning

Page 52: Supply Chain Management Supply Chain Management

Strategic Role of Strategic Role of ForecastingForecasting

Focus on supply chain managementFocus on supply chain management Short term role of product demandShort term role of product demand Long term role of new products, Long term role of new products,

processes, and technologiesprocesses, and technologiesFocus on Total Quality ManagementFocus on Total Quality Management

Satisfy customer demandSatisfy customer demand Uninterrupted product flow with no Uninterrupted product flow with no

defective itemsdefective itemsNecessary for strategic planningNecessary for strategic planning

Page 53: Supply Chain Management Supply Chain Management

Total Quality ManagementTotal Quality Management• Management approach to long term

success through customer satisfaction

• Total Quality Control - process of creating and producing quality goods and services that meet the expectations of the customer

• quality - conformance to requirements or fitness for use

Page 54: Supply Chain Management Supply Chain Management

Trumpet of DoomTrumpet of Doom• As forecast horizon increases, so does the

forecasting error (i.e., accuracy decreases) – shorten horizon by shortening of cycles or flow times

• Law of Large Numbers – as volume increases, relative variability decreases – forecasting error is smaller: goal – forecast at aggregate levels; collaborate; standardize parts

• Volume and activity increase at end of reporting periods – Krispy Kreme

Page 55: Supply Chain Management Supply Chain Management

Time FrameTime Frame Short-range, medium-Short-range, medium-

range, long-rangerange, long-range

Demand BehaviorDemand Behavior Trends, cycles, seasonal Trends, cycles, seasonal

patterns, randompatterns, random

Components of Components of Forecasting DemandForecasting Demand

Page 56: Supply Chain Management Supply Chain Management

Time FrameTime Frame

Short-range to medium-rangeShort-range to medium-range Daily, weekly monthly forecasts of Daily, weekly monthly forecasts of

sales datasales data Up to 2 years into the futureUp to 2 years into the future

Long-rangeLong-range Strategic planning of goals, products, Strategic planning of goals, products,

marketsmarkets Planning beyond 2 years into the futurePlanning beyond 2 years into the future

Page 57: Supply Chain Management Supply Chain Management

Demand BehaviorDemand BehaviorTrendTrend

gradual, long-term up or down gradual, long-term up or down movementmovement

CycleCycle up & down movement repeating over up & down movement repeating over

long time framelong time frameSeasonal patternSeasonal pattern

periodic oscillation in demand which periodic oscillation in demand which repeatsrepeats

Random movements follow no patternRandom movements follow no pattern

Page 58: Supply Chain Management Supply Chain Management

Forms of Forecast MovementForms of Forecast Movement

TimeTime(a) Trend(a) Trend

TimeTime(d) Trend with seasonal pattern(d) Trend with seasonal pattern

TimeTime(c) Seasonal pattern(c) Seasonal pattern

TimeTime(b) Cycle(b) Cycle

Dem

and

Dem

and

Dem

and

Dem

and

Dem

and

Dem

and

Dem

and

Dem

and

Random Random movementmovement

Figure 8.1Figure 8.1

Page 59: Supply Chain Management Supply Chain Management

Forecasting MethodsForecasting MethodsTime seriesTime series

Regression or causal modelingRegression or causal modeling

Qualitative methodsQualitative methods Management judgment, expertise, opinionManagement judgment, expertise, opinion Use management, marketing, purchasing, Use management, marketing, purchasing,

engineeringengineering

Delphi methodDelphi method Solicit forecasts from expertsSolicit forecasts from experts

Page 60: Supply Chain Management Supply Chain Management

Time Series MethodsTime Series MethodsStatistical methods using historical Statistical methods using historical

datadata Moving averageMoving average Exponential smoothingExponential smoothing Linear trend lineLinear trend line

Assume patterns will repeatAssume patterns will repeatNaive forecastsNaive forecasts

Forecast = data from last periodForecast = data from last period

Page 61: Supply Chain Management Supply Chain Management

Moving AverageMoving AverageAverage several periods of dataAverage several periods of dataDampen, smooth out changesDampen, smooth out changesUse when demand is stable with no Use when demand is stable with no

trend or seasonal patterntrend or seasonal patternstock market analysis - trend stock market analysis - trend

analysisanalysis

Page 62: Supply Chain Management Supply Chain Management

Moving AverageMoving AverageAverage several Average several

periods of dataperiods of dataDampen, smooth out Dampen, smooth out

changeschangesUse when demand is Use when demand is

stable with no trend stable with no trend or seasonal patternor seasonal pattern

Sum of Demand In n Periods

n

Page 63: Supply Chain Management Supply Chain Management

Simple Moving AverageSimple Moving Average

JanJan 120120FebFeb 9090MarMar 100100AprApr 7575MayMay 110110JuneJune 5050JulyJuly 7575AugAug 130130SeptSept 110110OctOct 9090

ORDERSORDERSMONTHMONTH PER MONTHPER MONTH

Example 8.1Example 8.1

Page 64: Supply Chain Management Supply Chain Management

JanJan 120120FebFeb 9090MarMar 100100AprApr 7575MayMay 110110JuneJune 5050JulyJuly 7575AugAug 130130SeptSept 110110OctOct 9090

ORDERSORDERSMONTHMONTH PER MONTHPER MONTH

Example 8.1Example 8.1

MAMAnovnov = = 33

==90 + 110 + 13090 + 110 + 130

33

= 110 orders for Nov= 110 orders for Nov

Simple Moving AverageSimple Moving Average

Daug+Dsep+Doct

Page 65: Supply Chain Management Supply Chain Management

JanJan 120120 ––FebFeb 9090 – –MarMar 100100 – –AprApr 7575 103.3103.3MayMay 110110 88.388.3JuneJune 5050 95.095.0JulyJuly 7575 78.378.3AugAug 130130 78.378.3SeptSept 110110 85.085.0OctOct 9090 105.0105.0NovNov – – 110.0110.0

ORDERSORDERS THREE-MONTHTHREE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE

Example 8.1Example 8.1

Simple Moving AverageSimple Moving Average

Page 66: Supply Chain Management Supply Chain Management

JanJan 120120 ––FebFeb 9090 – –MarMar 100100 – –AprApr 7575 103.3103.3MayMay 110110 88.388.3JuneJune 5050 95.095.0JulyJuly 7575 78.378.3AugAug 130130 78.378.3SeptSept 110110 85.085.0OctOct 9090 105.0105.0NovNov – – 110.0110.0

ORDERSORDERS THREE-MONTHTHREE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE

Example 8.1Example 8.1

MAMA55 = =

55

ii = 1= 1 DDii

55

==90 + 110 + 130 + 75 + 5090 + 110 + 130 + 75 + 50

55

= 91 orders for Nov= 91 orders for Nov

Simple Moving AverageSimple Moving Average

Page 67: Supply Chain Management Supply Chain Management

Example 8.1Example 8.1

Simple Moving AverageSimple Moving Average

JanJan 120120 –– – –FebFeb 9090 – – – –MarMar 100100 – – – –AprApr 7575 103.3103.3 – –MayMay 110110 88.388.3 – –JuneJune 5050 95.095.0 99.099.0JulyJuly 7575 78.378.3 85.085.0AugAug 130130 78.378.3 82.082.0SeptSept 110110 85.085.0 88.088.0OctOct 9090 105.0105.0 95.095.0NovNov – – 110.0110.0 91.091.0

ORDERSORDERS THREE-MONTHTHREE-MONTH FIVE-MONTHFIVE-MONTHMONTHMONTH PER MONTHPER MONTH MOVING AVERAGEMOVING AVERAGE MOVING AVERAGEMOVING AVERAGE

Page 68: Supply Chain Management Supply Chain Management

150 150 –

125 125 –

100 100 –

75 75 –

50 50 –

25 25 –

0 0 –| | | | | | | | | | |

JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov

Ord

ers

Ord

ers

MonthMonthFigure 8.2Figure 8.2

Smoothing EffectsSmoothing Effects

Page 69: Supply Chain Management Supply Chain Management

Smoothing EffectsSmoothing Effects150 150 –

125 125 –

100 100 –

75 75 –

50 50 –

25 25 –

0 0 –| | | | | | | | | | |

JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov

Ord

ers

Ord

ers

MonthMonth

ActualActual

Figure 8.2Figure 8.2

Page 70: Supply Chain Management Supply Chain Management

Smoothing EffectsSmoothing Effects150 150 –

125 125 –

100 100 –

75 75 –

50 50 –

25 25 –

0 0 –| | | | | | | | | | |

JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov

3-month3-month

ActualActual

Ord

ers

Ord

ers

MonthMonthFigure 8.2Figure 8.2

Page 71: Supply Chain Management Supply Chain Management

Smoothing EffectsSmoothing Effects150 150 –

125 125 –

100 100 –

75 75 –

50 50 –

25 25 –

0 0 –| | | | | | | | | | |

JanJan FebFeb MarMar AprApr MayMay JuneJune JulyJuly AugAug SeptSept OctOct NovNov

5-month5-month

3-month3-month

ActualActual

Ord

ers

Ord

ers

MonthMonthFigure 8.2Figure 8.2

Page 72: Supply Chain Management Supply Chain Management

Weighted Moving AverageWeighted Moving Average

Adjusts moving average Adjusts moving average method to more closely method to more closely reflect data fluctuationsreflect data fluctuations

Page 73: Supply Chain Management Supply Chain Management

Weighted Moving AverageWeighted Moving Average

WMAWMAnn = = ii = 1 = 1 WWii D Dii

wherewhere

WWii = the weight for period = the weight for period ii, ,

between 0 and 100 between 0 and 100 percentpercent

WWii = 1.00= 1.00

Adjusts Adjusts moving moving average average method to method to more closely more closely reflect data reflect data fluctuationsfluctuations

Page 74: Supply Chain Management Supply Chain Management

Weighted Moving Weighted Moving Average ExampleAverage Example

MONTH MONTH WEIGHT WEIGHT DATADATA

AugustAugust 17%17% 130130SeptemberSeptember 33%33% 110110OctoberOctober 50%50% 9090

Example 8.2Example 8.2

Page 75: Supply Chain Management Supply Chain Management

Weighted Moving Weighted Moving Average ExampleAverage Example

MONTH MONTH WEIGHT WEIGHT DATADATA

AugustAugust 17%17% 130130SeptemberSeptember 33%33% 110110OctoberOctober 50%50% 9090

November forecastNovember forecast WMAWMA33 = = 33

ii = 1 = 1 WWii D Dii

= (0.50)(90) + (0.33)(110) + (0.17)(130)= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders= 103.4 orders3 Month = 110 5 month =

91

Page 76: Supply Chain Management Supply Chain Management

yy = = aa + + bxbx

wherewhereaa == intercept (at period 0)intercept (at period 0)bb == slope of the lineslope of the linexx == the time periodthe time periodyy == forecast for demand for period forecast for demand for period xx

Linear Trend LineLinear Trend Line

Page 77: Supply Chain Management Supply Chain Management

Seasonal AdjustmentsSeasonal Adjustments

Repetitive increase/ Repetitive increase/ decrease in demanddecrease in demand

Use seasonal factor Use seasonal factor to adjust forecastto adjust forecast

Page 78: Supply Chain Management Supply Chain Management

Seasonal AdjustmentsSeasonal Adjustments

Repetitive increase/ Repetitive increase/ decrease in demanddecrease in demand

Use seasonal factor Use seasonal factor to adjust forecastto adjust forecast

Seasonal factor = Seasonal factor = SSii = =DDii

DD= demand for period/sum of demand

Page 79: Supply Chain Management Supply Chain Management

Seasonal AdjustmentSeasonal Adjustment

1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0

2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1

2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6

Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7

DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)

YEARYEAR 11 22 33 44 TotalTotal

Page 80: Supply Chain Management Supply Chain Management

Seasonal AdjustmentSeasonal Adjustment

1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0

2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1

2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6

Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7

DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)

YEARYEAR 11 22 33 44 TotalTotal

SS11 = = = 0.28 = = = 0.28 DD11

DD

42.042.0148.7148.7

SS22 = = = 0.20 = = = 0.20 DD22

DD

29.529.5148.7148.7

SS44 = = = 0.37 = = = 0.37 DD44

DD

55.355.3148.7148.7

SS33 = = = 0.15 = = = 0.15 DD33

DD

21.921.9148.7148.7

Page 81: Supply Chain Management Supply Chain Management

Seasonal AdjustmentSeasonal Adjustment

1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0

2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1

2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6

Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7

DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)

YEARYEAR 11 22 33 44 TotalTotal

SSii 0.280.28 0.200.20 0.150.15 0.370.37

Page 82: Supply Chain Management Supply Chain Management

Seasonal AdjustmentSeasonal Adjustment

1999 12.61999 12.6 8.68.6 6.36.3 17.517.5 45.045.0

2000 14.12000 14.1 10.310.3 7.57.5 18.218.2 50.150.1

2001 15.32001 15.3 10.610.6 8.18.1 19.619.6 53.653.6

Total 42.0Total 42.0 29.529.5 21.921.9 55.355.3 148.7148.7

DEMAND (1000’S PER QUARTER)DEMAND (1000’S PER QUARTER)

YEARYEAR 11 22 33 44 TotalTotal

SSii 0.280.28 0.200.20 0.150.15 0.370.37

Forecast for 2002 using simple 3 year moving ave

4550.153.6

148.749.56667

50*.28 14Forecast for 1st qtr 2002

Page 83: Supply Chain Management Supply Chain Management

Forecast AccuracyForecast Accuracy

Find a method which minimizes Find a method which minimizes errorerror

Error = Actual - ForecastError = Actual - ForecastMean Absolute Mean Absolute

Deviation (MAD)Deviation (MAD)

Page 84: Supply Chain Management Supply Chain Management

MAD ExampleMAD Example

11 3737 37.0037.0022 4040 37.0037.0033 4141 37.9037.9044 3737 38.8338.8355 4545 38.2838.2866 5050 40.2940.2977 4343 43.2043.2088 4747 43.1443.1499 5656 44.3044.30

1010 5252 47.8147.811111 5555 49.0649.061212 5454 50.8450.84

557557

PERIODPERIOD DEMAND, DEMAND, DDtt FFtt ( ( =0.3) =0.3)

Page 85: Supply Chain Management Supply Chain Management

Forecast ControlForecast ControlReasons for out-of-control forecastsReasons for out-of-control forecasts

Change in trendChange in trend Appearance of cycleAppearance of cycle Weather changesWeather changes PromotionsPromotions CompetitionCompetition PoliticsPolitics

Page 86: Supply Chain Management Supply Chain Management

Tracking SignalTracking Signal• Tracking Signal establishes control limits -

usually +/- 3 MAD• The greater the tracking signal the more

the demand exceeds the forecast• Sum(Demand-Forecast)/Mean Absolute

Deviation• Sometimes called Running Sum of

Forecasting Error

Page 87: Supply Chain Management Supply Chain Management

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• Chap 9

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